Economic concerns from Europe to North America have caused stocks of Canadian banks to pull back after a strong start to the year. At this point, the sector is doing slightly better than the broader market, registering a 4-per-cent decline year-to-date compared with a 7-per-cent retreat for the S&P/TSX composite index.

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Market View

Third-quarter earnings season for Canada’s banks begins in less than a week, with Bank of Montreal kicking things off on Aug. 23 and Laurentian Bank of Canada and Canadian Western Bank closing things out on Sept. 2. While expectations are modest, analysts note that dividends could begin creeping up again soon.

More about today’s screen

The chart shows stock performance for the year to date as well as yields and dividend payout ratios, or the percentage of earnings that a bank gives back to shareholders through dividends.

We have included data from Kevin Choquette, an analyst with Scotia Capital Inc., who has charted estimated dividend increase potential based on each bank’s dividend payout target range. Mr. Choquette listed a low, middle and high target in a report published on Tuesday. In our chart, we have included his mid-range figures. He does not cover Bank of Nova Scotia.

What we found

With six of the eight banks having payout ratios of less than 50 per cent, there remains a fair amount of room for dividend increases. The banks have only recently begun to increase their dividends after several years of avoiding boosting payouts, partly on the advice of the federal banking regulator.

During the financial crisis, the banks were advised to preserve capital until new global banking rules were set. That advisory was lifted last fall, setting the stage for higher investor expectations.

Based on mid-range targets, four of the banks have the potential to boost dividends, according to Mr. Choquette. But if the banks were to move up to the high end of their payout targets, all of the banks could increase payouts, ranging from a 4-per-cent increase by Royal Bank of Canada and BMO, to a 44-per-cent rise by Laurentian, he notes.

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